Our rating does not factor a proposal by Aluminum Corp. of China Ltd. (Chalco; foreign currency BBB/Negative/--; cnA-/--) to acquire a controlling stake in Winsway. In our view, if the transaction materializes, it could help Winsway to access additional railway capacity and avoid a potential inventory build-up. Moreover, Chalco’s ownership may improve Winsway’s access to capital markets. On April 23, 2012, Winsway announced that its major shareholder and chairman and CEO, Mr. Wang Xingchun, entered into the share sale and purchase agreement with Chalco to purchase 29.9% of Winsway’s stake.
We have revised our base-case scenario for Winsway to suggest that the company’s earnings could break even in the second half of 2012. Winsway’s EBITDA margin could improve but will stay at less than 5% in 2012, compared with 0.9% in the first half of the year. The ratio of total debt to EBITDA could remain weak at more than 15x.
Winsway’s liquidity is “adequate”, as defined in our criteria. We expect the company’s sources of liquidity to cover its uses by more than 1.2x in 2012. Our liquidity assessment is based on the following factors and assumptions:
-- Winsway’s sources of liquidity include cash, pledged deposits, funds from operations, and a US$20 million undrawn facility for GCC’s working capital.
-- As of June 30, 2012, Winsway has cash and cash equivalents of about HK$3.87 billion, of which HK$2.34 billion is un-restricted. The company has short-term debt of about HK$2.19 billion.
-- Winsway’s uses of liquidity include cash consideration for the acquisition, planned capital expenditure, working capital needs, debt repayments (we expect the company to reach an agreement with Minsheng Bank to delay the amortization of a US$350 million term loan), and dividend distribution.
-- We expect net sources to remain positive even if EBITDA declines by 15%.
Winsway has about HK$4.90 billion in undrawn uncommitted bank facilities as of June 30, 2012. The company’s bank loans do not have financial covenants.
The negative rating outlook reflects our view that a strong recovery in coking coal demand and prices is uncertain. Winsway’s credit protection measures are therefore likely to remain weak for the rating over the next 12 months
We may lower the rating if: (1) Winsway’s financial performance does not improve in the next few quarters, such that its ratio of total debt to EBITDA stays above 6.0x on a consistent basis; or (2) GCC’s business and financial performance deteriorates further. The rating could also come under pressure if Winsway’s liquidity weakens further due to potential bond redemption. Nevertheless, we believe that the risk of this is low.
We could revise the outlook to stable if: (1) GCC ramps up its coal production, significantly lowers its average production costs, and returns to profit; and (2) Winsway improves its profitability and financial strength, such that its ratio of total debt to EBITDA returns to below 5x on a sustainable basis.
Related Criteria And Research
-- Winsway Coking Coal Holdings Ltd. ‘B+’ Rating Placed On CreditWatch Negative On Deteriorating Profitability, July 18, 2012
-- Winsway Coking Coal Holdings Ltd.’s Potential Ownership Change Has No Immediate Rating Implications, April 25, 2012
-- Winsway Coking Coal Holdings Ltd. Downgraded To ‘B+’ On Heightened Business Risk; Outlook Stable, Feb. 28, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In the Mining Industry, June 23, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Winsway Coking Coal Holdings Ltd.
Corporate Credit Rating B+/Negative/-- B+/Watch Neg/--
Senior Unsecured B+ B+/Watch Neg
Downgraded; CreditWatch/Outlook Action
Winsway Coking Coal Holdings Ltd.
Corporate Credit Rating
Greater China Regional Scale cnBB-/-- cnBB/Watch Neg/--
Senior Unsecured cnBB- cnBB/Watch Neg